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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 
For the fiscal year ended December 31, 2019

Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 
 
For the transition period from                              to
 
Commission File Number: 000-52170
________________________________________ 
 
INNERWORKINGS, INC.
(Exact name of registrant as specified in its charter)
________________________________________ 
Delaware
 
20-5997364
(State or Other Jurisdiction of
 
(I.R.S. Employer
Incorporation or Organization)
 
Identification No.)
 
203 North LaSalle Street, Suite 1800
Chicago, Illinois 60601
Phone: (312) 642-3700
(Address, zip code and telephone number, including area code, of principal executive offices)

Securities registered pursuant to Section 12(b) of the Act:
 
 
 
 
 
Title of Each Class
 
Trading Symbol
 
Name of Each Exchange on Which Registered
Common Stock, $0.0001 par value
 
INWK
 
Nasdaq Global Market
Securities registered pursuant to Section 12(g) of the Act: None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes       No  
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes       No    
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes       No  
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   Yes       No  
 




Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
 
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes:  No:   

The aggregate market value of the common equity held by non-affiliates of the registrant as of June 30th, 2019, the last business day of the registrant’s most recent completed second quarter, was $142,440,160 (based on the closing sale price of the registrant’s common stock on that date as reported on the Nasdaq Global Market).
 
As of March 13, 2020, the registrant had 52,142,896 shares of common stock, par value $0.0001 per share, outstanding.

 
DOCUMENTS INCORPORATED BY REFERENCE
 
The registrant intends to file with the Securities and Exchange Commission a proxy statement pursuant to Regulation 14A or an amendment to this report filed under cover of Form 10-K/A containing the information required to be disclosed under Part III of Form 10-K within 120 days of the end of its fiscal year ended December 31, 2019. Portions of such proxy statement or Form 10-K/A are incorporated by reference into Part III of this Annual Report on Form 10-K. 










TABLE OF CONTENTS
 
 
 
 
 
 
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4.
Mine Safety Disclosures
 
 
 
 
 
 
 
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6.
Selected Financial Data
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Item 9B.
Other Information
 
 
 
 
 
 
 
Item 10.
Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13.
Certain Relationships and Related Transactions and Director Independence
Item 14.
Principal Accountant Fees and Services
 
 
 
 
 
 
 
Item 15.
Exhibits and Financial Statement Schedules
Item 16.
Form 10-K Summary
 
 
 
Signatures
 

3



PART I
 
Unless otherwise indicated or the context otherwise requires, references in this Annual Report on Form 10-K to “InnerWorkings, Inc.,” “InnerWorkings,” the "Company” “we,” “us” or “our” are to InnerWorkings, Inc., a Delaware corporation and its subsidiaries.
 
Forward-Looking Statements 
 
Certain statements in this Annual Report on Form 10-K are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements involve a number of risks, uncertainties and other factors that could cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Factors which could materially affect such forward-looking statements can be found in Part I, Item 1A entitled “Risk Factors” and Part II, Item 7 entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Annual Report on Form 10-K. Investors are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements made herein are only made as of the date hereof. Except as expressly required by federal securities laws, we undertake no obligation to publicly update such forward-looking statements to reflect subsequent events or changed circumstances.

Item 1.
Business
 
Our Company 

We are a leading global marketing execution firm for some of the world's most marketing intensive companies, including those listed in the Fortune 1000. As a comprehensive outsourced global solution, we leverage proprietary technology, an extensive supplier network and deep domain expertise to streamline the creation, production and distribution of marketing and promotional materials, signage and displays, retail experiences, events and promotions and product packaging across every major market worldwide. The items we source generally are procured through the marketing supply chain and we refer to these items collectively as marketing materials. Through our network of more than 12,000 global suppliers, we offer a full range of fulfillment and logistics services that allow us to procure marketing materials of virtually any kind. The breadth of our product offerings and services and the depth of our supplier network enable us to fulfill the marketing materials procurement needs of our clients.

Our proprietary software applications and databases create a fully-integrated solution that stores, analyzes and tracks the production capabilities of our supplier network, as well as detailed pricing data. As a result, we believe we have one of the largest independent repositories of supplier capabilities and pricing data for suppliers of marketing materials around the world. Our technology and databases of product and supplier information are designed to capitalize on excess manufacturing capacity and other inefficiencies in the traditional marketing materials supply chain to obtain favorable pricing while delivering high-quality products and services for our clients.
 
We use our supplier capability and pricing data to match orders with suppliers that are optimally suited to meet the client's needs at a highly competitive price. By leveraging our technology and data, our clients are able to reduce overhead costs, redeploy internal resources and obtain favorable pricing and service terms. In addition, our ability to track individual transactions and provide customized reports detailing procurement activity on an enterprise-wide basis provides our clients with greater visibility and control of their marketing materials expenditures.
 
We generate revenue by procuring marketing materials from our suppliers and selling those products to our clients. We procure products for clients across a wide range of industries, such as retail, financial services, hospitality, consumer packaged goods, non-profits, healthcare, pharmaceuticals, food and beverage, broadcasting and cable, and transportation.
 
We were formed in 2001, commenced operations in 2002, and converted from a limited liability company to a Delaware corporation in 2006. Our corporate headquarters are located in Chicago, Illinois. For the year ended December 31, 2019, our annual revenue was $1.2 billion, and we operated in 58 global office locations.

We organize our operations into three segments based on geographic regions: North America, EMEA, and LATAM. The North America segment includes operations in the United States and Canada; the EMEA segment includes operations in the United Kingdom, continental Europe, the Middle East, Africa, and Asia; and the LATAM segment includes operations in Mexico, Central America,

4



and South America. We believe the opportunity exists to expand our business into new geographic markets. Our objective is to continue to increase our sales in the major markets in the United States and internationally.

Industry Overview
 
Our business of providing marketing execution solutions primarily includes the procurement of marketing materials, branded merchandise, product packaging and retail displays. Procurement of marketing materials is often dispersed across several areas of a business, including sales, marketing, communications and finance. The traditional process of procuring, designing and producing an order often requires extensive collaboration by manufacturers, designers, agencies, brokers, fulfillment and other middlemen, which is highly inefficient for the customer, who typically pays a mark-up at each intermediate stage of the supply chain. Consolidating marketing activities across the organization represents an opportunity to reduce total expenditure and decrease the number of vendors in the marketing supply chain.
 
To become more competitive, many large corporations seek to focus on their core competencies and outsource non-core business functions, which typically include marketing execution. We seek to capitalize on the trends impacting the marketing supply chain and the movement towards outsourcing of non-core business functions by leveraging our proprietary technology, deep domain expertise, extensive supplier network and purchasing power.
 
Our Solution 
 
Utilizing our proprietary technology and data, we provide our clients a global solution to procure and deliver marketing materials at favorable prices. Our network of more than 12,000 global suppliers offers a wide variety of products and a full range of print, fulfillment and logistics services.
 
Our procurement software and database seeks to capitalize on excess manufacturing capacity and other inefficiencies in the traditional supply chain for marketing materials. We believe that the most competitive prices we obtain from our suppliers are offered by the suppliers with the most unused capacity. We utilize our technology to:
 
greatly increase the number of suppliers that we can access on behalf of our clients or that our clients can access efficiently;
obtain favorable pricing and deliver high quality products and services for our clients; and
aggregate our purchasing power.

Our proprietary technology and data streamline the procurement process for our clients by eliminating inefficiencies within the traditional marketing supply chain and expediting production. However, our technology cannot manage all of the variables associated with procuring marketing materials, which often involves extensive collaboration among numerous parties. Effective management of the procurement process requires dedicated and experienced personnel working closely with both clients and suppliers. Our account executives and production managers perform that critical function.
 
Account executives act as the primary sales staff to our clients. Production managers manage the entire procurement process for our clients to ensure timely and accurate delivery of the finished product. For each order we receive, a production manager uses our technology to gather specifications, solicit bids from the optimal suppliers, establish pricing with the client, manage production and coordinate the purchase and delivery of the finished product.
 
Each client is assigned an account executive and one or more production managers, who develop relationships with client personnel responsible for authorizing and making purchases. Our largest clients often are assigned multiple production managers. In certain cases, our production managers function on-site at the client's offices. Whether on-site or off-site, a production manager functions as a virtual employee of the client. As of December 31, 2019, we had approximately 600 production managers and account executives, including over 200 working on-site at our clients' offices.

Our Proprietary Technology
 
Our proprietary technology is a fully-integrated solution that stores equipment profiles for our supplier network and price data for orders we quote and execute. Our technology allows us to match orders with the suppliers in our network that are optimally suited to produce an order at a highly competitive price. Our technology also allows us to efficiently manage the critical aspects of the procurement process, including gathering order specifications, identifying suppliers, establishing pricing, managing production and coordinating purchase and delivery of the finished product. 


5



Our database stores the production capabilities of our supplier network, as well as price and quote data for bids we receive and transactions we execute. As a result, we maintain one of the largest independent repositories of equipment profiles and price data for suppliers of marketing materials. Our production managers use this data to discover excess manufacturing capacity, select optimal suppliers, negotiate favorable pricing and efficiently procure high-quality products and services for our clients. We rate our suppliers based on product quality, customer service and overall satisfaction. This data is stored in our database and used by our production managers during the supplier selection process.
 
We believe our proprietary technology allows us to procure marketing materials more efficiently than traditional manual or semi-automated systems used by many manufacturers in the marketplace. Our technology includes the following features:
 
Customized order management. Our solution automatically generates customized data entry screens based on product type and guides the production manager to enter the required job specifications. For example, if a production manager selects “envelope” in the product field, the screen will automatically prompt the production manager to specify the size, paper type, window size and placement and display style.
Cost management. Our solution reconciles supplier invoices to executed orders to ensure the supplier adhered to the pricing and other terms contained in the order. In addition, it includes checks and balances that allow us to monitor important financial indicators relating to an order, such as projected gross margin and significant job alterations.
Standardized reporting. Our solution generates transaction reports that contain quote, supplier capability, price and customer service information regarding the orders the client has completed with us. These reports can be customized, sorted and searched based on a specified time period or the type of product, price or supplier. In addition, the reports give our clients insight into their spend for each individual job and on an enterprise-wide basis, which allows the client to track the amounts it spends on job components such as paper, production and logistics.
Task-tracking.  Our solution creates a work order checklist that sends e-mail reminders to our production managers regarding the time elapsed between certain milestones and the completion of specified deliverables. These automated notifications enable our production managers to focus on more critical aspects of the process and eliminate delays.
Historical price baseline.  Some of our larger clients provide us with pricing data for orders they completed before they began to use our solution. For these clients, our solution automatically compares our current price for a job to the price obtained by the client for a comparable historical job, which enables us to demonstrate on an ongoing basis the cost savings we provide.

We have created customized e-commerce stores on our client and third party platforms to order pre-selected products, such as personalized stationery, marketing brochures and promotional products. Automated order processes can send requests to our vendors for fulfillment or printing of variable print on demand products.
 
Our Clients
 
We procure marketing materials for corporate clients across a wide range of industries, such as retail, financial services, hospitality, consumer packaged goods, non-profits, healthcare, food and beverage, broadcasting and cable and transportation. Our clients also include manufacturers that outsource jobs to us because they do not have the requisite capabilities or capacity to complete an order. Our services are provided under long-term contracts, purchase orders, or other contractual arrangements, and the scope and terms of these contracts vary by client. For the years ended December 31, 2019, 2018, and 2017, our largest customer accounted for 5%, 5%, and 5% of our revenue, respectively. Revenue from our top ten clients accounted for 26%, 27%, and 28% of our revenue in 2019, 2018, and 2017, respectively.
 
Our Products and Services
 
We offer a full range of solutions to support the marketing execution needs of our clients. Our outsourced print management solution encompasses the design, sourcing and delivery of printed marketing materials such as direct mail, in-store signage and marketing collateral. We provide a similar outsourced solution for the design, sourcing and delivery of other categories in the marketing supply chain, such as branded merchandise and product packaging. We also assist clients with the management of events and promotions spending and related procurement needs. Our retail environments solution involves the design, sourcing and installation of point of sale displays, permanent retail fixtures and overall store design. We also offer on-site outsourced creative studio services and digital marketing services, including retail digital display solutions.
 
We offer comprehensive fulfillment and logistics services, such as kitting and assembly, inventory management and pre-sorting postage. These services are often essential to the completion of the finished product. For example, we assemble multi-level direct mailings, insurance benefits packages and coupons and promotional incentives that are included with credit card and bank statements. We also provide creative services, including copywriting, graphics and website design, identity work and marketing

6



collateral development and pre-media services, such as image and print-ready page processing and proofing capabilities. Our e-commerce and online collaboration technology empowers our clients with branded self-service e-commerce websites that prompt quick and easy online ordering, fulfillment, tracking and reporting.

We agree to provide our clients with products that conform to the industry standard of a “commercially reasonable quality” and our suppliers in turn agree to provide us with products of the same quality. The contracts we execute with our clients typically include customary provisions that limit the amount of our liability for product defects. To date, we have not experienced significant claims or liabilities relating to defective products.
 
Our Supplier Network
 
Our global network of more than 12,000 suppliers includes graphic designers, paper mills and merchants, digital imaging companies, specialty binders, finishing and engraving firms, fulfillment and distribution centers and manufacturers of displays and promotional items.
 
These suppliers have been selected from among thousands of potential suppliers worldwide on the basis of price, quality, delivery and customer service. We direct requests for quotations to potential suppliers based on historical pricing data, quality control rankings, and geographic proximity to a client or other criteria specified by our clients. In 2019, our top ten suppliers accounted for approximately 22% of our cost of goods sold in the aggregate and no supplier accounted for more than 5% of our cost of goods sold.
 
We have established a quality control program that is designed to ensure that we deliver high-quality products and services to our clients through the suppliers in our network.
 
Sales and Marketing
 
Our sales and account executives sell our marketing execution solutions to corporate clients. Our client engagement professionals support the sales and account executives with project execution and account management. As of December 31, 2019, we had approximately 350 sales executives, account executives, and client engagement professionals. Our agreements with our sales and account executives require them to market and sell our solutions on an exclusive basis and contain non-compete and non-solicitation provisions that apply during and for a specified period after the term of their service.
 
We expect to continue our growth by recruiting and retaining highly qualified account executives and providing them with the tools to be successful in the marketplace. There are a large number of experienced sales representatives globally, and we believe that we will be able to identify additional qualified account executives from this pool of individuals. We also expect to augment our sales force through selective acquisitions of other businesses that offer marketing execution services, including brokers that employ experienced sales personnel with established client relationships.
  
We believe that we offer account executives an attractive opportunity because they can utilize our vast supplier network, proprietary pricing data and customized order management solution to sell virtually any type of marketing materials at a highly competitive price. In addition, the diverse production and service capabilities of the suppliers in our network provide our account executives the opportunity to deliver a more complete product and service offering to our clients. We believe we can better attract and retain experienced account executives than our competitors because of the breadth of products offered by our supplier network.
 
To date, we have been successful in attracting and retaining qualified account executives. The on-boarding process consists of training with our sales management, as well as access to a variety of sales and educational resources that are available on our intranet.
 
Competition
 
Our marketing execution solutions compete with in-house procurement departments in large marketing intensive companies, creative agencies that purchase marketing materials on behalf of their clients in connection with the agencies’ marketing campaign and brand strategy services and companies in several manufacturing industries, including design, graphics art, digital imaging and fulfillment and logistics. As a result, we compete on some level with virtually every company that is involved in printing, from graphic designers to pre-press firms and fulfillment companies.
 
Our competitors include manufacturers that employ traditional methods of marketing and selling their printed materials. The manufacturers with which we compete generally own and operate their own manufacturing equipment and typically serve clients only within the specific product categories that their equipment produces.

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We also compete with manufacturing management firms and brokers. These competitors generally do not own or operate printing equipment and typically work with a limited number of suppliers and have minimal financial investment in the quality of the products produced for their clients. Our industry experience indicates that several of these competitors offer print procurement services or enterprise software applications for the print industry.
 
The principal elements of competition in marketing materials procurement are price, product quality, customer service, technology and reliability. Although we believe our business delivers products and services on competitive terms, our business and the marketing execution industry are relatively new and are evolving rapidly.
  
Intellectual Property
 
We rely primarily on a combination of copyright, patent, trademark and trade secret laws to protect our intellectual property rights. We also protect our proprietary technology through confidentiality and non-disclosure agreements with our employees and independent contractors.
 
Our IT infrastructure provides a high level of security for our proprietary database. The storage system for our proprietary data is designed to ensure that power and hardware failures do not result in the loss of critical data. The proprietary data is protected from unauthorized access through a combination of physical and logical security measures, including firewalls, antivirus software, intrusion detection software, password encryption and physical security, with access limited to authorized personnel. In addition to our security infrastructure, our system data is backed up and stored in a redundant facility on a daily basis to prevent the loss of our proprietary data due to catastrophic failures or natural disasters. We test our overall IT recovery ability, co-location facility, and our back-up processes annually to verify that we can recover our business critical systems in a timely fashion.
 
Employees
 
As of December 31, 2019, we had approximately 2,100 employees in over 20 countries. We consider our employee relations to be strong.
 
Available Information
 
We make available, free of charge through our website, www.inwk.com, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, including exhibits and any amendments to those reports, filed with or furnished to the Securities and Exchange Commission ("SEC"). We make these reports available through our website as soon as reasonably practicable after our electronic filing of such materials with or the furnishing of them to, the SEC. The information contained on our website is not a part of this Annual Report on Form 10-K and shall not be deemed incorporated by reference into this Annual Report on Form 10-K or any other public filing made by us to the SEC. The SEC maintains an internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at www.sec.gov.

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Item 1A.
Risk Factors
 
Set forth below are certain risk factors that could harm our business, results of operations and financial condition. You should carefully read the following risk factors, together with the financial statements, related notes and other information contained in this Annual Report on Form 10-K. Our business, financial condition and operating results may suffer if any of the following risks are realized. If any of these risks or uncertainties occur, the trading price of our common stock could decline and you might lose all or part of your investment. There may be additional risks of which we are not presently aware or that we currently believe are immaterial that could have an adverse impact on our business. This Annual Report on Form 10-K contains forward-looking statements that contain risks and uncertainties. Please refer to the discussion of “forward-looking statements” on page four of this Annual Report on Form 10-K in connection with your consideration of the risk factors and other important factors that may affect future results described below.
 
Risks Related to Our Business

A significant or prolonged economic downturn or a decline in the demand for marketing materials, could adversely affect our revenue and results of operations.
Our results of operations are affected directly by the level of business activity of our clients, which in turn is affected by the level of economic activity and cyclicality in the industries and markets that they serve. Certain of our products are sold to industries, including the advertising, retail, consumer products, housing, financial and pharmaceutical industries, that experience significant fluctuations in demand based on general economic conditions, cyclicality and other factors beyond our control. Economic uncertainty or an economic downturn could result in a reduction of the marketing budgets of our clients or a decrease in the volume of marketing materials that our clients order from us. Reduced demand from one of these industries or markets could negatively affect our revenue, operating income and profitability.

Our results could be negatively impacted by a global or regional epidemic or similar event.
We operate in approximately 50 countries, including China, Italy, Spain, France and Germany. In aggregate, revenue from outside of the United States represented 30% of our company’s total revenue for the year ended December 31, 2019. For some of the products and services we sell, including branded merchandise, retail displays and luxury packaging, we have historically sourced many of our goods from manufacturers and other suppliers in China.  As a result, an epidemic or similar event in any location where we, our suppliers, or our clients operate, could result in serious harm to our business and operating results if it depresses demand for marketing materials or results in major disruptions or delays in our supply chain.  Following the early 2020 outbreak of COVID-19 coronavirus, many of our suppliers in China temporarily halted manufacturing, and have only recently restarted production. The recent spread of COVID-19 in the United States, our largest market, has also raised concerns about a possible recession, and created substantial uncertainty about the expectations for marketing spend in the near term.  In addition, for some products and services we sell, including retail displays and warehouse and logistics services, our ability to complete orders and earn revenues depends in part on the physical performance of services by our personnel at a specific location, such as a client retail location or one of our warehouses. Due to temporary travel restrictions imposed by various countries in Europe and elsewhere, including the Czech Republic where our retail displays business is based, we may face delays in our ability to complete retail display installations for some clients. Moreover, we have historically relied on in-person selling efforts by our sales executives to secure long-term client contracts.  In the short-term, precautionary measures taken by many companies around the world to limit in-person workplace contact in order to reduce the potential for employee exposure to COVID-19 could extend the time required to secure new client contracts. If our business is materially affected by the recent outbreak of the COVID-19 coronavirus, or by similar widespread outbreaks of contagious disease in the future, it could have a material adverse impact on our operating results or financial condition.
 
Competition could substantially impair our business and our operating results. 
We compete with companies in the manufacturing of marketing related products, including printed materials, in-store displays, packaging materials, graphics art and digital imaging and fulfillment and logistics. Competition in these industries is intense. Our primary competitors are manufacturers that employ traditional methods of marketing and selling their marketing materials. Some of these manufacturers have larger client bases and significantly more resources than we do. Buyers may prefer to utilize the traditional services offered by the manufacturers with whom we compete. Alternatively, some of these manufacturers may elect to offer outsourced print procurement services or enterprise software applications and their well-established client relationships, industry knowledge, brand recognition, financial and marketing capabilities, technical resources and pricing flexibility may provide them with a competitive advantage over us.


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We also compete with a number of management firms and brokers. Several of these competitors offer outsourced procurement services or enterprise software applications for the marketing industry. These competitors or new competitors that enter the market may also offer procurement services similar to and competitive with, or superior to, our current or proposed offerings and may achieve greater market acceptance. In addition, a software solution and database similar to our proprietary technology could be created over time by a competitor with sufficient financial resources and comparable industry experience. If our competitors are successful in selling and providing comparable services, we could lose clients and our market share could decline.

Our competitors may also establish cooperative relationships to increase their ability to address client needs. Increased competition may lead to revenue reductions, reduced gross margins or a loss of market share, any one of which could harm our business and our operating results.
 
If our services do not achieve widespread commercial acceptance, our business will suffer.
Most companies currently coordinate the procurement and management of their marketing materials with their own employees using a combination of telephone, e-mail, their own technology platforms and the Internet. Growth in the demand for our services depends on the adoption of our outsourcing model for marketing related procurement services. We may not be able to persuade prospective clients to change their traditional procurement processes. Our business could suffer if our services are not accepted or are not perceived by the marketplace to be effective or valuable.
 
If our suppliers do not meet our needs or expectations or those of our clients, our business would suffer.
The success of our business depends to a large extent on our relationships with our clients and our reputation for high quality marketing materials and marketing execution services. We do not own manufacturing equipment. Instead, we rely on third-party suppliers to deliver the products and services that we provide to our clients. If our suppliers do not meet our needs or expectations or those of our clients, our professional reputation may be damaged, our business would be harmed and we could be subject to legal liability.

A significant portion of our revenue is derived from a relatively limited number of large clients and any loss or decrease in sales to these clients could harm our results of operations.
A significant portion of our revenue is derived from a relatively limited number of large clients. Revenue from our top ten clients accounted for 26%, 27%, and 28% of our revenue during the years ended December 31, 2019, 2018, and 2017, respectively. Our largest client accounted for 5%, 5%, and 5% of our revenue in 2019, 2018, and 2017, respectively. We cannot guarantee that we will maintain or improve our relationships with these clients or that we will continue to provide services to these clients at historical levels. In the future, there may be a loss or reduction in business from one or more of our large clients. The loss or significant reduction of business from our major clients would adversely affect our results of operations.

Additionally, in general, we take full title and risk of loss for the products we procure from our suppliers. Our obligation to pay our suppliers is not contingent upon receipt of payment from our clients. If any of our key clients fails to pay for our services, our profitability would be negatively impacted.
 
We may face difficulties operating profitably in countries in which we have limited operating experience.
Aggregate revenue from outside of the United States represented 30%, 32%, and 31% of total revenue for the years ended December 31, 2019, 2018, and 2017, respectively. We expect our global footprint to continue evolving, which may involve expanding into countries other than those in which we currently operate or increasing our operations in countries where we currently have limited operations and resources. Our business outside of the United States is subject to various risks, including:
 
changes in economic and political conditions;
changes in and compliance with international and domestic laws and regulations, including anti-corruption laws such as the U.S. Foreign Corrupt Practices Act and the U.K. Anti-Bribery Act and data privacy laws such as the European Union General Data Protection Regulation;
wars, civil unrest, acts of terrorism and other conflicts;
natural disasters, pandemics and health crises (such as the recent coronavirus outbreak);
compliance with and changes in tariffs, trade restrictions, trade agreements and taxation;
difficulties in managing or overseeing foreign operations;
limitations on the repatriation of funds because of foreign exchange controls;
political and economic corruption;
less developed and less predictable legal systems than those in the United States; and

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intellectual property laws of countries which do not protect our intellectual property rights to the same extent as the laws of the United States.

The occurrence or consequences of any of these factors may lead to significant legal or compliance expenses and may restrict our ability to operate in the affected region or result in the loss of clients in the affected region or other regions, which could adversely affect our revenue, operating income and profitability.
 
As we expand our business in foreign countries, we will become exposed to increased risk of loss from foreign currency fluctuations and exchange controls, particularly the strengthening of the U.S. dollar against major currencies, as well as longer accounts receivable payment cycles. We have limited control over these risks and if we do not correctly anticipate changes in international economic and political conditions, we may not alter our business practices in time to avoid adverse effects.

Changes in the United Kingdom's economic and other relationships with the European Union could adversely affect us.
On January 31, 2020, the United Kingdom formally withdrew from the European Union. Pursuant to the Withdrawal Agreement Bill, the United Kingdom will remain in the European Union's free market and customs union until December 31, 2020. On January 1, 2021, the United Kingdom will withdraw from the free market and customs union, and trade between the European Union and the United Kingdom will be subject to border controls. During the transition, the parties will negotiate a free trade agreement to manage future trade in goods and services. However, it is possible that an agreement will not be reached within the transition period, and there remains significant uncertainty about the terms of the future trade relationship between the European Union and the United Kingdom. We conduct a portion of our business in both the United Kingdom and the European Union. In 2019, we generated 8.2% of our revenue in the United Kingdom and 8.7% in other countries within the European Union. Our supply chain depends on the free flow of goods in those regions. The ongoing uncertainty and likely re-imposition of border controls and customs duties on trade between the United Kingdom and European Union nations could negatively impact our competitive position, supplier and customer relationships and financial performance. The ultimate effects of the United Kingdom's withdrawal from the European Union on us will depend on the specific terms of any agreement the United Kingdom and the European Union reach to provide access to each other’s respective markets.

Changes in U.S. administrative policy, including changes to existing trade agreements and any resulting changes in international relations, could adversely affect our financial performance and supply chain economics.
As a result of changes to U.S. administrative policy, among other possible changes, there may be (i) changes to existing trade agreements; (ii) greater restrictions on free trade generally; and (iii) significant increases in tariffs on goods imported into the United States, particularly those manufactured in China, Mexico and Canada. China is currently a leading global source of promotional marketing products, such as branded merchandise and barware, sold in the United States, and Canada supplies a substantial percentage of the pulp and paper used by the U.S. printing industry. In January 2020, the United States signed the "Phase 1" trade agreement with China, effective in February 2020, which created a temporary tariff truce with China. The United States, Mexico and Canada signed the United States-Mexico-Canada Agreement ("USMCA"), the successor agreement to the North American Free Trade Agreement ("NAFTA"). The USMCA has been ratified by Mexico and the United States, but Canada has not yet done so.

It remains unclear what the U.S. administration or foreign governments, including China, will or will not do with respect to tariffs, NAFTA, USMCA or other international trade agreements and policies. A trade war, other governmental action related to tariffs or international trade agreements, changes in U.S. social, political, regulatory and economic conditions or in laws and policies governing foreign trade, manufacturing, development and investment in the territories and countries where we currently do business or any resulting negative sentiments towards the United States could adversely affect our supply chain economics, consolidated revenue, earnings and cash flow.
 
We are subject to taxation related risks in multiple jurisdictions.
We are a U.S.-based multinational company subject to tax in multiple U.S. and foreign tax jurisdictions. Significant judgment is required in determining our global provision for income taxes, deferred tax assets or liabilities and in evaluating our tax positions on a worldwide basis. While we believe our tax positions are consistent with the tax laws in the jurisdictions in which we conduct our business, it is possible that these positions may be overturned by jurisdictional tax authorities, which may have a significant impact on our global provision for income taxes. Tax laws are dynamic and subject to change as new laws are passed and new interpretations of the law are issued or applied. We are also subject to ongoing tax audits. These audits can involve complex issues, which may require an extended period of time to resolve and can be highly subjective. Tax authorities may disagree with certain tax reporting positions taken by us and, as a result, assess additional taxes against us. We regularly assess the likely outcomes of these audits in order to determine the appropriateness of our tax provision.


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In addition, governmental tax authorities are increasingly scrutinizing the tax positions of companies. Many countries in the European Union, as well as a number of other countries and organizations such as the Organization for Economic Cooperation and Development, are actively considering changes to existing tax laws that, if enacted, could increase our tax obligations in countries where we do business. The impact of tax reform in the U.S. or other foreign tax law changes could result in an overall tax rate increase to our business.

If we are unable to retain and expand the number of our sales executives or if a significant number of our sales executives leave InnerWorkings, our revenue could be negatively impacted.
Our ability to expand our business will depend largely on our ability to attract and retain sales executives with the skills and experience needed to develop new client relationships. We rely on our core team of approximately 10 enterprise sales executives to win business from new, large clients. Competition for qualified sales executives can be challenging and we may be unable to hire such individuals. In addition, we must properly incentivize our sales executives to obtain new clients and promote the renewal and expansion of existing client relationships. Any difficulties we experience in hiring or retaining sales executives could have a negative impact on our ability to expand our client base, increase our revenue and continue our growth.
 
Most of our clients may terminate their relationships with us on short notice with no or limited penalties.
Many of our clients use our services on an order-by-order basis rather than under long-term contracts. These clients have no obligation to continue using our services and may stop purchasing from us at any time. We have entered into long-term contracts and contract renewals with many of our clients, which are generally for three to five-year initial terms. Most of these contracts, however, permit the clients to terminate our engagements upon prior notice, typically ranging from 90 days to 12 months with limited or no penalties.
 
The volume and type of services we provide our clients may vary from year to year and could be reduced if a client were to change its outsourcing or procurement strategy. If a significant number of our clients elect to terminate or not to renew their engagements with us or if the volume of their orders decreases, our business, operating results and financial condition could suffer.
 
We may not be able to develop or implement new systems, procedures and controls that are required to support the continued growth in our operations.
Our business continues to grow in size and complexity, and continued growth could place a significant strain on our ability to: 
recruit, motivate and retain qualified account executives, production managers and management personnel;
preserve our culture, values and entrepreneurial environment;
develop and improve our internal administrative infrastructure and execution standards; and
maintain high levels of client satisfaction.

To manage our growth, we must implement and maintain proper operational and financial controls and systems. Further, we will need to manage our relationships with various clients and suppliers. We cannot give any assurance that we will be able to develop and implement, on a timely basis, the systems, procedures and controls required to support the growth in our operations or effectively manage our relationships with various clients and suppliers. If we are unable to manage our growth, our business, operating results and financial condition could be adversely affected.  
 
Our business and stock price may be adversely affected if our internal controls over financial reporting are not effective.
Section 404 of the Sarbanes-Oxley Act of 2002 requires companies to conduct a comprehensive annual evaluation of their internal control over financial reporting. To comply with this statute, each year we are required to document and test our internal control over financial reporting; our management is required to assess and issue a report concerning our internal control over financial reporting; and our independent registered public accounting firm is required to report on the effectiveness of our internal control over financial reporting. 

In our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, we reported that management identified material weaknesses in our internal controls over financial reporting as of December 31, 2018, which were remediated in 2019. See “Item 9A. Controls and Procedures.” 

We cannot assure that we will not discover other material weaknesses in the future. The existence of one or more material weaknesses could result in errors to our financial statements and substantial costs and resources may be required to correct and remediate internal control deficiencies and to defend litigation. If we cannot produce reliable financial reports, investors could lose

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confidence in our reported financial information, the market price of our common stock could decline significantly, we may be unable to obtain additional financing to operate and expand our business and our business and financial results could deteriorate.

The global integration of our technology platform may result in business interruptions.
We are currently implementing a common technology platform across our global operations. The implementation of and such changes to our technology platform and related software carry risks such as cost overruns, project delays and business interruptions and delays. If we experience a material business interruption as a result of this process, it could have a material adverse effect on our business, financial position and results of operations.
 
Security and privacy breaches may damage client relations and inhibit our growth.
The secure and uninterrupted operation of our information technology systems is critical to our business. Despite the security measures that we have implemented, including those measures related to cybersecurity, our systems, as well as those of our customers, suppliers and other service providers could be breached or damaged by computer viruses, malware, phishing attacks, denial-of-service attacks, natural or man-made incidents or disasters, or unauthorized physical or electronic access. These types of incidents have become more prevalent and pervasive across industries, including in our industry, and are expected to continue in the future. A breach could result in business disruption, theft of our intellectual property, trade secrets or customer information and unauthorized access to personal information, such as email or mailing addresses of our clients’ customers or employees. Although cybersecurity and the continued development and enhancement of our controls, processes and practices designed to protect our information technology systems from attack, damage or unauthorized access are a high priority for us, our activities and investment may not be deployed quickly enough or successfully protect our systems against all vulnerabilities, including technologies developed to bypass our security measures. In addition, outside parties may attempt to fraudulently induce employees or customers to disclose access credentials or other sensitive information in order to gain access to our secure systems and networks. There are no assurances that our actions and investments to improve the maturity of our systems, processes and risk management framework or remediate vulnerabilities will be sufficient or completed quickly enough to prevent or limit the impact of any cyber intrusion. Moreover, because the techniques used to gain access to or sabotage systems often are not recognized until launched against a target, we may be unable to anticipate the methods necessary to defend against these types of attacks and we cannot predict the extent, frequency or impact these problems may have on us. To the extent that our business is interrupted or data is lost, destroyed or inappropriately used or disclosed, such disruptions could adversely affect our competitive position, relationships with our customers, financial condition, operating results and cash flows and/or subject us to regulatory actions, including those contemplated by data privacy laws and regulations like the European Union General Data Protection Regulation and California Consumer Privacy Act, or litigation. In addition, we may be required to incur significant costs to protect against the damage caused by these disruptions or security breaches in the future.

We are also dependent on security measures that some of our third-party customers, suppliers and other service providers take to protect their own systems and infrastructures. Some of these third parties store or have access to certain of our sensitive data, as well as confidential information about their own operations, and as such are subject to their own cybersecurity threats.

Any security breach of any of these third-parties’ systems could result in unauthorized access to our information technology systems, cause us to be non-compliant with applicable laws or regulations, subject us to legal claims or proceedings, disrupt our operations, damage our reputation, and cause a loss of confidence in our products and services, any of which could adversely affect our financial performance.
 
A decrease in levels of excess capacity in the commercial print industry could have an adverse impact on our business.
We believe that for the past several years the U.S. commercial print industry has experienced significant levels of excess capacity. Our business seeks to capitalize on imbalances between supply and demand in the print industry by obtaining favorable pricing terms from suppliers in our network with excess capacity. Reduced excess capacity in the print industry generally and in our supplier network specifically, could have an adverse impact on our ability to execute our business strategy and on our business results and growth prospects.
 
Our inability to protect our intellectual property rights may impair our competitive position.
If we fail to protect our intellectual property rights adequately, our competitors could replicate our proprietary technology and processes and offer similar services, which would harm our competitive position. We rely primarily on a combination of copyright, patent, trademark and trade secret laws and confidentiality and nondisclosure agreements to protect our proprietary technology. We cannot be certain that the steps we have taken to protect our intellectual property rights will be adequate or that third parties will not infringe or misappropriate our rights or imitate or duplicate our services and methodologies. We may need to litigate to enforce our

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intellectual property rights or determine the validity and scope of the rights of others. Any such litigation could be time-consuming and costly.
 
If we are unable to maintain our proprietary technology, demand for our services and therefore our revenue could decrease.
We rely heavily on our proprietary technology to procure marketing materials for our clients. To keep pace with changing technologies and client demands, we must correctly interpret and address market trends and enhance the features and functionality of our technology in response to these trends, which may lead to significant research and development costs. We may be unable to accurately determine the needs of buyers or the trends in the marketing industry or to design and implement the appropriate features and functionality of our technology in a timely and cost-effective manner, which could result in decreased demand for our services and a corresponding decrease in our revenue.
 
In addition, we must protect our systems against physical damage from fire, earthquakes, power loss, telecommunications failures, computer viruses, hacker attacks, physical break-ins and similar events. Any software or hardware damage or failure that causes interruption or an increase in response time of our proprietary technology could reduce client satisfaction and decrease usage of our services.
 
If the key members of our management team do not remain with us in the future, our business, operating results and financial condition could be adversely affected.
Our future success will depend to a significant extent on the continued services of our current executive team, including Rich Stoddart our Chief Executive Officer, Don Pearson, our Chief Financial Officer, Oren Azar, our General Counsel, Renae Chorzempa, our Chief Human Resources Officer, Adan Pope, our Chief Technology Officer, and Ron Provenzano, our Head of Operations Excellence. The loss of the services of these individuals could adversely affect our business, operating results and financial condition and could divert other senior management time in searching for their replacements.

Our business is subject to seasonal sales fluctuations, which could result in volatility or have an adverse effect on the market price of our common stock.
Our business is subject to some degree of sales seasonality. Historically, the percentage of our annual revenue earned during the third and fourth fiscal quarters has been higher due, in part, to a greater number of orders for marketing materials in anticipation of the year-end holiday season. If our business continues to experience seasonality, we may incur significant additional expenses during our third and fourth quarters, including additional staffing expenses. Consequently, if we were to experience lower than expected revenue during any future third or fourth quarter, whether from a general decline in economic conditions or other factors beyond our control, our expenses may not be offset, which would have a disproportionate impact on our operating results and financial condition for that year. Such fluctuations in our operating results could result in volatility or have an adverse effect on the market price of our common stock.

Price fluctuations in raw materials costs could adversely affect the margins on our orders.
Our business relies on a constant supply of various raw materials, including paper and ink. Prices within the print industry are directly affected by the cost of paper, which is purchased in a price sensitive market that has historically exhibited price and demand cyclicality. Prices are also affected by the cost of ink. Our profit margin and profitability are largely a function of the rates that our suppliers charge us compared to the rates that we charge our clients. If our suppliers increase the price of our orders and we are not able to find suitable or alternative suppliers, our profit margin may decline.
 
Our ability to obtain financing or raise capital in the future may be limited and our failure to raise capital when needed could prevent us from growing.
We may in the future be required to raise capital through public or private financing or other arrangements. Such financing may not be available on acceptable terms, or at all, and our failure to raise capital when needed could harm our business. Furthermore, additional equity financing may dilute the interests of our common stockholders, and debt financing, if available, may involve restrictive covenants that could further restrict our business activities or our ability to execute our strategic objectives and could reduce our profitability.


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If LIBOR ceases to exist after 2021, it may result in higher interest rates, which could result in higher interest expense.
The interest rates under our Credit Agreements are calculated using the London Inter-bank Offered Rate (“LIBOR”). In July 2017, the Financial Conduct Authority (the authority that regulates LIBOR) announced that it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. These reforms may cause LIBOR to perform differently than it has in the past, and LIBOR may ultimately cease to exist after 2021. Alternative benchmark rates may replace LIBOR and could affect our debt payments. At this time, it is not possible to predict the effect of any changes to LIBOR, any phase out of LIBOR or any establishment of alternative benchmark rates. Any new benchmark rate will likely not replicate LIBOR exactly, which could impact our Credit Agreements. There is uncertainty about how applicable law and the courts will address the replacement of LIBOR with alternative rates on contracts that do not include alternative rate fallback provisions. If LIBOR ceases to exist after 2021, it may result in higher interest rates. In addition, any changes to benchmark rates may have an uncertain impact on our cost of funds and our access to the capital markets, which could impact our results of operations and cash flows.

We may not be able to successfully implement initiatives, including our restructuring activities, that reduce our cost structure while driving returns for clients and stockholders.
Achieving our long-term profitability goals depends significantly on our ability to control or reduce our operating costs. If we are not able to identify and implement initiatives that control or reduce costs and increase operating efficiency, or if the cost savings initiatives we have implemented to date do not generate expected cost savings, our financial results could be adversely impacted. Our efforts to control or reduce costs may include restructuring activities involving workforce reductions, lease and contract terminations and other cost reduction initiatives. Some of the operational improvements we may make to reduce our cost structure are expected to involve significant change management and will require careful management to avoid disrupting client and employee relationships. If we do not successfully manage our current restructuring activities, or any other restructuring activities that we may undertake in the future, expected efficiencies and benefits may be delayed or not realized, and our operations and business could be disrupted.

 
Risks Related to Ownership of Our Common Stock
 
The trading price of our common stock has been and may continue to be volatile.
The trading prices of many small and mid-cap companies are highly volatile. Since our initial public offering in August 2006 through December 31, 2019, the closing sale price of our common stock as reported by the Nasdaq Global Market has ranged from a low of $1.92 on March 2, 2009 to a high of $18.69 on October 9, 2007.
 
Certain factors may continue to cause the market price of our common stock to fluctuate, including:
 
fluctuations in our quarterly financial results or the quarterly financial results of companies perceived to be similar to us;
changes in market valuations of similar companies;
changes in economic and political conditions in the United States or abroad;
success of competitive products or services;
changes in our capital structure, such as future issuances of debt or equity securities;
announcements by us, our competitors, our clients or our suppliers of significant products or services, contracts, acquisitions or strategic alliances;
regulatory developments in the United States or foreign countries;
litigation involving our company, our general industry or both;
additions or departures of key personnel;
investors’ general perception of us; and
changes in general industry and market conditions.

In addition, if the stock market experiences a loss of investor confidence, then the trading price of our common stock could decline for reasons unrelated to our business, financial condition or results of operations. If any of the foregoing occurs, it could cause our stock price to fall and may expose us to class action lawsuits that could be costly to defend and a distraction to management. As a result, you could lose all or part of your investment.


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Our quarterly results are difficult to predict and may vary from quarter to quarter, which may result in our failure to meet the expectations of investors and increased volatility of our stock price.
The continued use of our services by our clients depends, in part, on the business activity of our clients and our ability to meet their cost saving needs, as well as their own changing business conditions. The time between our payment to the supplier and our receipt of payment from our clients varies with each job and client. In addition, a significant percentage of our revenue is subject to the discretion of our clients, who determine the timing of specific orders and may also stop using our services at any time, subject, in the case of most of our clients, to advance notice requirements. Therefore, the number, size and profitability of jobs may vary significantly from quarter to quarter. As a result, our quarterly operating results are difficult to predict and may fall below the expectations of current or potential investors in some future quarters, which could lead to significant variations in the market price of our stock. The factors that are likely to cause these variations include:

the demand for our marketing execution solutions;
the use of outsourced enterprise solutions;
clients’ business decisions regarding the quantities of marketing materials they purchase;
the number, timing and profitability of our jobs, unanticipated contract terminations and job postponements;
new product introductions and enhancements by our competitors;
changes in our pricing policies;
our ability to manage costs, including personnel costs; and
costs related to possible acquisitions of other businesses.

We do not currently intend to pay dividends, which may limit the return on your investment.
 
We have not declared or paid any cash dividends on our common stock. We currently intend to retain all available funds and any future earnings for use in the operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future.
 
If our board of directors authorizes the issuance of preferred stock, holders of our common stock could be diluted and harmed.
 
Our board of directors has the authority to issue up to 5,000,000 shares of preferred stock in one or more series and to establish the preferred stock’s voting powers, preferences and other rights and qualifications without any further vote or action by the stockholders. The issuance of preferred stock could adversely affect the voting power and dividend liquidation rights of the holders of common stock. In addition, the issuance of preferred stock could have the effect of making it more difficult for a third party to acquire or discouraging a third party from acquiring, a majority of our outstanding voting stock or otherwise adversely affect the market price of our common stock. It is possible that we may need to raise capital through the sale of preferred stock in the future.

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Item 1B.
Unresolved Staff Comments
 
None.  

Item 2.
Properties
 
Properties

The table below provides a brief description of our significant properties by segment as of December 31, 2019:
Location
 
Segment
 
Use
Chicago, IL (USA)
 
Other (Shared Services)
 
Principal executive office
Portland, OR (USA)
 
North America
 
Office
New York City, NY (USA)
 
North America
 
Office
Plano, TX (USA)
 
North America
 
Office
Grand Rapids, MI (USA)
 
North America
 
Office
Detroit, MI (USA)
 
North America
 
Office
Prague, Czech Republic
 
EMEA
 
Office
West Yorkshire, United Kingdom
 
EMEA
 
Office
Paris, France
 
EMEA
 
Office
Moscow, Russia
 
EMEA
 
Office
Tokyo, Japan
 
EMEA
 
Office
Tsim Sha Tsui, Hong Kong
 
EMEA
 
Office
Seoul, South Korea
 
EMEA
 
Office
New South Wales, Australia
 
EMEA
 
Office
Dubai, United Arab Emirates
 
EMEA
 
Office
Barcelona, Spain
 
LATAM
 
Office
Lima, Peru
 
LATAM
 
Office
Mexico City, Mexico
 
LATAM
 
Office
Bogota, Colombia
 
LATAM
 
Office
Sao Paulo, Brazil
 
LATAM
 
Office
Buenos Aires, Argentina
 
LATAM
 
Office
Blue Ash, OH (USA)
 
North America
 
Warehouse
Greenville, WI (USA)
 
North America
 
Warehouse
Irvine, CA (USA)
 
North America
 
Warehouse
Trooper, PA (USA)
 
North America
 
Warehouse
Somers, WI (USA)
 
North America
 
Warehouse
Portland, OR (USA)
 
North America
 
Warehouse
Kildare, Ireland
 
EMEA
 
Office/Warehouse
Prague, Czech Republic
 
EMEA
 
Warehouse
Solihull, United Kingdom
 
EMEA
 
Office/Warehouse
Shanghai, China
 
EMEA
 
Warehouse
Mexico City, Mexico
 
LATAM
 
Warehouse

Our principal executive offices are located in Chicago, Illinois. We have 21 other office and warehouse locations in the United States and 36 office locations in 20 other countries around the world, including Chile, Brazil, Peru, Mexico, Argentina, the United

17



Kingdom, Spain, France, Czech Republic, Ireland, Russia, Dubai, China, Hong Kong, Japan, Australia and various other countries. The locations are principally used for sales, operations, finance, administration and warehousing. We believe that our facilities are generally suitable to meet our needs for the foreseeable future; however, we will continue to seek additional space as needed to satisfy our growth. All of the properties where we conduct our business are leased. The terms of the leases vary and have expiration dates through June 30, 2031.

Item 3.
Legal Proceedings

We are party to various legal proceedings incidental to our business. Certain claims, suits and complaints arising in the ordinary course of business have been filed or are pending against us. Based on facts now known, we believe all such matters are adequately provided for, covered by insurance, are without merit, and/or involve such amounts that would not materially adversely affect our consolidated results of operations, cash flows or financial position.

For information on our non-ordinary course legal proceedings, see Note 11, Commitments and Contingencies, to the Consolidated Financial Statements included in this Annual Report on Form 10-K.

Item 4.
Mine Safety Disclosures
 
Not applicable.


18



PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

Our common stock is listed and traded on the Nasdaq Global Select Market under the symbol "INWK."

Holders
 
As of March 13, 2020, there were 17 holders of record of our common stock, which does not include stockholders who held their shares through brokers or other nominees in "street name." The holders of our common stock are entitled to one vote per share.
   
Dividends
 
We currently do not pay any dividends on our common stock and intend to retain all available funds and any future earnings for use in the operation and expansion of our business. Any determination in the future to pay dividends will depend upon our financial condition, capital requirements, operating results and other factors deemed relevant by our board of directors, including any contractual or statutory restrictions on our ability to pay dividends.
 
Recent Sales of Unregistered Securities

None.

Issuer Purchases of Equity Securities
 
Refer to Note 15, Share Repurchase Program, for discussion related to the Company's share repurchase program.

The following table provides information relating to our purchase of shares of our common stock in the fourth quarter of 2019 (in thousands, except per share amounts): 
Period
Number of Shares Purchased(1)
 
Average Price Paid Per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs(2)
10/1/19-10/31/19

 
$

 

 

11/1/19-11/30/19
2

 
4.45

 

 

12/1/19-12/31/19

 

 

 

Total
2

 
$
4.45

 

 

(1) Represents shares delivered to us by employees to satisfy the mandatory tax withholding requirement upon vesting of restricted stock.
(2) As noted above and within Note 15, Share Repurchase Program, the program purchase period lapsed on May 31, 2019, and shares are no longer available for purchase under the plan.


19



Stock Performance Graph 

The information contained in the following chart is not considered to be “soliciting material,” or “filed,” or incorporated by reference in any past or future filing by the Company under the Securities Act or Exchange Act unless and only to the extent that, the Company specifically incorporates it by reference.
 
The following graph assumes $100 was invested on December 31, 2014 in the common stock of the Company and each of the following indices and assumes reinvestment of any dividends. The stock price performance on the graph below is not necessarily indicative of future stock price performance.

https://cdn.kscope.io/4fb8ec53e070be762296a28f6e713fa5-chart-052311296d295911b96.jpg
 
 
Dec 31, 2014
 
Dec 31, 2015
 
Dec 31, 2016
 
Dec 31, 2017
 
Dec 31, 2018
 
Dec 31, 2019
INWK
 
$
100.00

 
$
96.28

 
$
126.44

 
$
128.75

 
$
48.01

 
$
70.73

NASDAQ Market Index
 
$
100.00

 
$
105.73

 
$
113.66

 
$
145.76

 
$
140.10

 
$
189.45

Dow Jones Business Support Services Index
 
$
100.00

 
$
109.64

 
$
123.62

 
$
154.78

 
$
145.32

 
$
208.87


20



Item 6.
Selected Financial Data
 
The following table presents selected consolidated financial and other data as of and for the periods indicated. The following information should be read in conjunction with the consolidated financial statements and the accompanying notes and "Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K. We have revised the prior period consolidated financial statements for the years ended December 31, 2018 and 2017 to reflect immaterial errors identified and described within Note 2, Summary of Significant Accounting Policies and summarized within Note 21, Revision of Prior Period Financial Statements.
 
Year ended December 31,
 
2019
 
2018
 
2017
 
2016
 
2015
 
(in thousands, except per share amounts)
Consolidated Statements of Operations Data:
 
 
 
 
 
 
 
 
 
Revenue
$
1,157,834

 
$
1,121,106

 
$
1,138,370

 
$
1,094,402

 
$
1,028,892

Cost of goods sold
$
895,825

 
$
867,293

 
$
862,862

 
$
831,838

 
$
788,862

Gross profit
$
262,009

 
$
253,813

 
$
275,508

 
$
262,564

 
$
240,030

Income (loss) from operations
$
11,042

 
$
(68,183
)
 
$
33,546

 
$
19,022

 
$
(13,213
)
Net (loss) income
$
(10,075
)
 
$
(76,683
)
 
$
15,869

 
$
3,949

 
$
(32,389
)
 
 
 
 
 
 
 
 
 
 
Per Share Data:
 
 
 
 
 
 
 
 
 
Net (loss) income per share of common stock:
 
 
 

 
 
 
 
 
 

Basic
$
(0.19
)
 
$
(1.47
)
 
$
0.29

 
$
0.07

 
$
(0.61
)
Diluted
$
(0.19
)
 
$
(1.47
)
 
$
0.29

 
$
0.07

 
$
(0.61
)
 
 
 
 
 
 
 
 
 
 
Consolidated Balance Sheet Data:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
42,711

 
$
26,770

 
$
30,562

 
$
30,924

 
$
30,755

Working capital(1)
$
93,610

 
$
106,339

 
$
133,242

 
$
101,739

 
$
77,357

Total assets
$
629,283

 
$
621,729

 
$
650,035

 
$
593,987

 
$
601,251

Revolving credit facility(2)
$
60,679

 
$
142,736

 
$
128,398

 
$
107,468

 
$
99,258

Term loan(2)
$
96,742

 
$

 
$

 
$

 
$

Total stockholders’ equity
$
178,252

 
$
180,955

 
$
282,923

 
$
262,161

 
$
252,432

(1) Working capital represents accounts receivable, unbilled revenue, other receivables, inventories, prepaid expenses and other current assets, offset by accounts payable, accrued expenses, deferred revenue and other current liabilities.
(2) On July 16, 2019, the Company refinanced its debt, which is further discussed in Note 9, Revolving Credit Facilities and in Note 10, Long-Term Debt. The new debt structure provides long-term capital with improved flexibility to support the Company’s growth plans. The Company intends to use excess cash from operations to pay off debt and support working capital needs.

21



Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The following discussion should be read in conjunction with the consolidated financial statements and accompanying notes, which appear elsewhere in this Annual Report on Form 10-K. It contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed below and elsewhere in this Annual Report on Form 10-K, particularly in Part I, Item 1A. “Risk Factors.”

Overview

We are a leading global marketing execution firm for some of the world's most marketing intensive companies, including those listed in the Fortune 1000. As a comprehensive outsourced global solution, we leverage proprietary technology, an extensive supplier network and deep domain expertise to streamline the creation, production and distribution of marketing and promotional materials, signage and displays, retail experiences, events and promotions and product packaging across every major market worldwide. Refer to Part I, Item 1. Business of this Annual Report on Form 10-K for further discussion of our business including our product and service offerings, proprietary technology and business strategy.

On August 1, 2019, the Company acquired Madden Communications’ ("Madden") marketing execution business. The transaction included certain assets, contracts for customers in the beer, wine, and spirits sector, as well as logistics and creative solutions; however, the acquisition was considered immaterial for the Company's financial statements.

In addition, the Company completed a refinancing of its debt in a new long-term structure that provides us the liquidity and flexibility we need to execute our strategic and financial plans.

Outlook

Our objective is to continue to increase our sales in the United States and internationally by adding new clients and increasing our sales to existing clients through additional marketing execution services or geographic markets. In addition, we believe the opportunity exists to expand our business through acquisition and entry into new geographic markets. Operationally, we are integrating our product and service offerings, re-evaluating our geographic footprint, and creating synergies across various business units.
 
Revenue

Our revenue consists of the prices paid to us by our clients for marketing materials. These prices, in turn, reflect the amounts charged to us by our suppliers, other direct costs, plus our gross profit. Our gross profit margin may be fixed by contract or may depend on prices negotiated on a job-by-job basis. Once the client accepts our pricing terms, the selling price is established, and we arrange shipment of the product. The product is shipped directly from our supplier or from our warehouse to a destination specified by our client. The client is invoiced upon shipment or receipt, depending on contract terms, for the product as well as shipping and handling.

We agree to provide our clients with marketing materials that conform to the industry standard of a “commercially reasonable quality,” and our suppliers in turn agree to provide us with products of the same quality. In addition, the quotes we execute with our clients include customary industry terms and conditions that limit the amount of our liability for product defects. Product defects have not had a material adverse effect on our results of operations to date.
 
Operating Expenses and Income (Loss) from Operations
 
Our selling, general and administrative expenses consist of commissions paid to our account executives, compensation costs for our management team and production managers as well as compensation costs for our finance and support employees. In addition, selling, general and administrative expenses include public company expenses, facilities fees, travel and entertainment expenses, corporate systems fees, and legal and accounting fees.
 
We accrue for commissions when we recognize the related revenue and gross profit. Some of our account executives receive a monthly draw to provide them with a more consistent income stream. The cash paid to our account executives in advance of commissions earned is reflected as a prepaid expense on our balance sheet. As our account executives earn commissions, a portion of their commission payment is withheld and offset against their prepaid commission balance, if any. Our prepaid commission

22



balance, net of accrued earned commissions not yet paid, decreased $0.1 million from a net accrued commissions amount of $(5.6) million as of December 31, 2018 to $(5.5) million as of December 31, 2019.
 
Our provision for bad debt expense is determined by evaluating specific accounts receivable and contract asset balances based on historical collection trends, the age of outstanding receivables, and the creditworthiness of our customers. Our bad debt expense was approximately $1.1 million, $3.6 million, and $0.5 million in 2019, 2018, and 2017, respectively.
 
Our income (loss) from operations for the years ended December 31, 2019, 2018, and 2017 was $11.0 million, $(68.2) million, and $33.5 million, respectively.

Critical Accounting Policies

Our audited Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP"), The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and related disclosure of contingent assets and liabilities, revenue and expenses at the date of the consolidated financial statements. Generally, we base our estimates on historical experience and on various other assumptions in accordance with GAAP that we believe to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions and such differences could be material to our financial position and results of operations.

For additional detail regarding our critical accounting policies, see Note 2, Summary of Significant Accounting Policies to the Consolidated Financial Statements.

Revenue Recognition

The Company accounts for revenue in accordance with the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 606, Revenue from Contracts with Customers, and applies the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) we satisfy a performance obligation. We only apply the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods it transfers to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, we assess the goods promised within each contract and determine those that are performance obligations, and assess whether each promised good or service is distinct. We then recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

Revenue is generally reported on a gross basis as we typically control the goods or services before transferring to the customer. Under these arrangements, we are primarily responsible for the fulfillment, including the acceptability, of the marketing materials and other products or services. In addition, we have reasonable discretion in establishing the price, and in some transactions, we also have inventory risk and are involved in the determination of the nature or characteristics of the marketing materials and products. In some arrangements, we are not primarily responsible for fulfilling the goods or services. In arrangements of this nature, we do not control the goods or services before they are transferred to the customer and such revenue is reported on a net basis.

For a detailed discussion of our Revenue Recognition policy, see Note 2, Summary of Significant Accounting Policies and Note 4, Revenue Recognition to the Consolidated Financial Statements.

Accounts Receivable and Allowance for Doubtful Accounts

The carrying amount of accounts receivable is reduced by an allowance that reflects management’s best estimate of the amounts that will not be collected. Management reviews all accounts receivable balances and based on an assessment of current creditworthiness, estimates the portion, if any, of the balance that will not be collected. These estimates of balances that will not be collected are based on historical write offs and recoveries of accounts receivable. The estimates of recovery can change based on actual experience and therefore can affect the level of reserves we place on existing accounts receivable. Fully reserved receivables are reviewed on a monthly basis and uncollectible accounts are written off when all reasonable collection efforts have been exhausted. We believe our reserve level is appropriate considering the quality of the portfolio as of December 31, 2019. While credit losses have historically been within expectations and the provisions established, we cannot guarantee that our credit loss experience will continue to be consistent with historical experience.


23



Cost of Goods Sold and Gross Profit
 
Our cost of goods sold consists of the price at which we purchase products from our suppliers, facility costs, and personnel costs for creative design services and warehousing. We procure product for our own account and generally take full title and risk of loss upon shipment. Cost of goods sold was re-evaluated during the current period due to the Madden acquisition, which resulted in warehousing becoming a more prominent strategic initiative in the Company's operational structure. Costs relating to warehousing and certain other services dedicated to specific clients are now classified as cost of goods sold, whereas similar costs incurred historically were included in selling, general and administrative expenses and were immaterial in prior periods.
Our gross profit is determined by the selling prices of the product and shipping charges less the cost of the product, direct personnel, warehousing, and shipping and handling costs. Our gross profit for the years ended December 31, 2019, 2018, and 2017 was $262.0 million, $253.8 million, and $275.5 million, respectively.

Goodwill

The fair value estimates used in the goodwill impairment analysis require significant judgment. The fair value estimates are based on assumptions management believes to be reasonable, but that are inherently uncertain, including estimates of future revenue and operating margins and assumptions about the overall economic climate and the competitive environment for the business. The fair value determination of the North America reporting unit, the only reporting unit with goodwill remaining, primarily relies on management judgments around timing of generating revenue from recent new customer wins as well as timing of benefits expected to be received from the significant restructuring actions currently underway, see Note 7, Restructuring Activities and Charges to the Consolidated Financial Statements. If assumptions surrounding either of these factors change, then a future impairment charge may occur.

Goodwill represents the excess of purchase price over the fair value of net assets acquired in an acquisition. Goodwill is not amortized, but is evaluated for impairment on an annual basis, in the fourth quarter, or more frequently if events or changes in circumstances indicate that the reporting unit’s goodwill is less than it's carrying amount. Based on the results of our annual goodwill impairment test performed on our measurement date of October 1, 2019, we determined that no goodwill impairment charges were required for the North America reporting unit as the segment's fair value exceeded its carrying amount and is not at risk of failing step one. As of December 31, 2019, there were no events or circumstances which would more likely than not reduce the fair value of our reportable segment below its carrying amount. Refer to Note 5, Goodwill to the Consolidated Financial Statements for further discussion.

During 2018, the Company performed interim impairment assessments of goodwill, determining the enterprise value for its North America, EMEA and LATAM reporting units that considered both the discounted cash flow and guideline public company methods. The Company further compared the enterprise value of each reporting unit to its respective carrying value. The enterprise value for all reporting units were less than their respective carrying values resulting in the Company recognizing $18.4 million, $20.8 million and $7.1 million goodwill impairment charges, respectively.

Other Intangible Assets

The Company amortizes its intangible assets with finite lives over their respective estimated useful lives and reviews for impairment on an annual basis, or more frequently if events or changes in circumstances indicate that they may be impaired. The Company’s intangible assets consist of customer lists, non-competition agreements, trade names and patents. The Company’s customer lists, which have an estimated weighted-average useful life of approximately fourteen years, are being amortized using the economic life method. The Company’s non-competition agreements, trade names and patents are being amortized on the straight-line basis over their estimated weighted-average useful lives of approximately four years, thirteen years, and nine years, respectively.
Estimates of fair value are primarily determined using quoted market prices or discounted cash flows. These approaches use significant estimates and assumptions including projected future cash flows, discount rates reflecting the market rate of return, projected growth rates and determination and evaluation of appropriate market comparables. Based on the results of qualitative assessments of all reporting units, the Company concluded that no impairment existed at December 31, 2019

During 2018, the Company recognized a $13.8 million non-cash, intangible asset impairment charge related to certain customer lists. Of the total charge, $0.6 million related to the LATAM segment and $13.2 million related to the EMEA segment, and are included in the accumulated amortization balance.


24



Income Taxes
 
We operate in numerous states and countries through our various subsidiaries and must allocate our income, expenses and earnings under the various laws and regulations of each of these taxing jurisdictions. Accordingly, our provision for income taxes represents our total estimate of the liability that we have incurred in doing business each year in all of our locations. Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their tax bases and are stated at enacted tax rates expected to be in effect when taxes are actually paid or recovered. In determining whether we need to record a valuation allowance against our deferred tax assets, management must make a number of estimates, assumptions and judgments. We establish a valuation allowance to reduce deferred tax assets to the amount we believe is more likely than not to be realized. The determination to record or release valuation allowances requires significant judgment.

Leases

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This pronouncement requires lessees to recognize a liability for lease obligations, which represents the discounted obligation to make future lease payments, and a corresponding right-of-use asset on the balance sheet. The Company adopted ASU 2016-02, along with related clarifications and improvements, as of January 1, 2019, using the modified retrospective approach, which allows the Company to apply ASC 840, Leases, in the comparative periods presented in the year of adoption. The cumulative effect of adoption was recorded as an adjustment to the opening balance of retained earnings in the period of adoption.
 
The Company elected to use the package of practical expedients, which permitted the Company to not reassess: (i) whether a contract is or contains a lease, (ii) lease classification, and (iii) initial direct costs resulting from the lease. The Company has not elected the hindsight practical expedient, which permits the use of hindsight when determining lease term and impairment of operating lease assets. The Company elected to apply the short-term lease exception, which allows the Company to keep leases with terms of 12 months or less off the balance sheet. The Company also elected to combine lease and non-lease components as a single component for the Company's entire population of lease assets.

Lease costs for operating and financial leases are recorded within selling, general and administrative expenses. During the current year, a portion of warehousing costs was deemed eligible to be classified into cost of goods sold as they receive inventory, store bulk goods, and assemble materials to bring products to a salable condition.

Warrants, Embedded Derivatives and Fair Value

In accordance with ASC 820, Fair Value Measurements and Disclosures, the Company applies fair value accounting for all financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis.

The Company accounts for warrants issued in conjunction with its long-term debt and certain embedded derivatives in its revolving credit facility and long-term debt in accordance with the guidance contained in ASC Topic 815, Derivatives and Hedging. Warrants that are not deemed to be indexed to the Company’s own stock are classified as liabilities at their fair values at the time of issuance. Embedded derivatives that are not deemed to be clearly and closely related to the host debt contract are bifurcated and recorded separately as a discount on the related debt facility. These liabilities were subject to re-measurement at each balance sheet date, and any change in fair value is recognized in the Company's statement of operations. The fair values of the warrants and derivative liabilities are estimated using a Black-Scholes model and other valuation techniques. Further, the Company also discloses the fair value of its revolving credit facility and long-term debt facility using current market rates, see Note 13, Fair Value Measurement to the Consolidated Financial Statements.

Deferred Financing Fees and Debt Discounts

The Company accounts for debt issuance costs, warrants, and embedded derivative features as a discount on its long-term debt (the "original issue discount" or "OID"). Embedded derivative features related to the Company's revolving credit facility are also treated as a discount on the long-term portion of the revolving credit facility. The OID on long-term debt is amortized using the effective interest rate method and is recognized in interest expense. The discount on the revolving credit facility is amortized using the straight line method and is recognized in interest expense. Deferred financing fees related to the Company's revolving credit facility are included in other assets and amortized using the straight line method over the term of the revolving credit facility.


25



Results of Operations
 
The following table sets forth items derived from our audited consolidated statements of operations for the years ended December 31, 20192018 and 2017 (in thousands):
 
Year ended December 31,
 
2019
 
2018
 
2017
Revenue
$
1,157,834

100.0
 %
 
$
1,121,106

100.0
 %
 
$
1,138,370

100.0
 %
Cost of goods sold
895,825

77.4
 %
 
867,293

77.4
 %
 
862,862

75.8
 %
Gross profit
262,009

22.6
 %
 
253,813

22.6
 %
 
275,508

24.2
 %
Operating expenses:
 
 
 
 
 
 
 
 
Selling, general and administrative expenses
222,721

19.2
 %
 
238,537

21.3
 %
 
227,895

20.0
 %
Depreciation and amortization
12,328

1.1
 %
 
12,988

1.2
 %
 
13,390

1.2
 %
Change in fair value of contingent consideration

 %
 

 %
 
677

0.1
 %
Goodwill impairment

 %
 
46,319

4.1
 %
 

 %
Intangible and other asset impairments

 %
 
18,121

1.6
 %
 

 %
Restructuring charges
15,918

1.4
 %
 
6,031

0.5
 %
 

 %
Income (loss) from operations
11,042

1.0
 %
 
(68,183
)
(6.1
)%
 
33,546

2.9
 %
Other income (expense):
 
 
 
 
 
 
 
 
Interest income
366

 %
 
218

 %
 
97

 %
Interest expense
(14,097
)
(1.2
)%
 
(7,749
)
(0.7
)%
 
(4,729
)
(0.4
)%
Other, net
(3,686
)
(0.3
)%
 
(1,616
)
(0.1
)%
 
(1,788
)
(0.2
)%
Total other expense
(17,417
)
(1.5
)%
 
(9,147
)
(0.8
)%
 
(6,420
)
(0.6
)%
(Loss) income before income taxes
(6,375
)
(0.6
)%
 
(77,330
)
(6.9
)%
 
27,126

2.4
 %
Provision (benefit) for income tax
3,700

0.3
 %
 
(647
)
(0.1
)%
 
11,257

1.0
 %
Net (loss) income
$
(10,075
)
(0.9
)%
 
$
(76,683
)
(6.8
)%
 
$
15,869

1.4
 %

Comparison of years ended December 31, 2019, 2018, and 2017
 
Revenue
 
Our revenue by segment for each of the years presented was as follows (in thousands):
 
Year ended December 31,
 
2019
 
% of Total
 
2018
 
% of Total
 
2017
 
% of Total
North America
$
826,355

 
71.3
%
 
$
777,202

 
69.3
%
 
$
780,520

 
68.6
%
EMEA
250,719

 
21.7
%
 
260,729

 
23.3
%
 
265,669

 
23.3
%
LATAM
80,760

 
7.0
%
 
83,175

 
7.4
%
 
92,181

 
8.1
%
Revenue from third parties
$
1,157,834

 
100.0
%
 
$
1,121,106

 
100.0
%
 
$
1,138,370

 
100.0
%
 

2019 compared to 2018. Revenue increased by $36.7 million, or 3.3%, in the year ended December 31, 2019 over the corresponding period in 2018.
 
Bill and Hold Arrangements
As a result of the material weaknesses previously disclosed, insufficient evidence existed to support the recognition of revenue in arrangements containing bill and hold provisions, and as such, the Company deferred the related revenue until product shipped from the Company’s warehouse. In connection with the remediation of those material weaknesses, the Company is now able to support earlier revenue recognition for bill and hold arrangements resulting in $15.0 million of incremental revenue, $3.1 million of incremental gross margin and $2.8 million of incremental EBITDA in the fourth quarter of 2019.

North America 
North America revenue increased by $49.2 million, or 6.3%, in the year ended December 31, 2019 over the corresponding period in 2018. The increase was primarily due to an increase in revenue from bill and hold arrangements resulting in $12.1 million of revenue, along with new business generated and continued growth from existing enterprise clients.

26



 
EMEA 
EMEA revenue decreased by $10.0 million, or 3.8%, in the year ended December 31, 2019 over the corresponding period in 2018. The decrease was driven by $22.7 million primarily related to foreign currency impacts and declines or delays in marketing spend by certain clients, partially offset by $9.6 million in new business and $3.0 million of revenue for bill and hold arrangements.
 
LATAM
LATAM revenue decreased by $2.4 million, or 2.9%, in the year ended December 31, 2019 over the corresponding period in 2018. The decrease was driven primarily by a $4.8 million decline in marketing spend by certain clients and foreign currency impacts, offset by $2.4 million in new business.

2018 compared to 2017. Our revenue decreased by $17.3 million, or 1.5%, in the year ended December 31, 2018 over the corresponding period in 2017.
 
North America 
North America revenue decreased by $3.3 million, or 0.4%, in the year ended December 31, 2018 over the corresponding period in 2017. This decrease primarily relates to declines in revenue from certain of the Company's transactional and small customers, partially offset by growth from new and existing enterprise clients.
 
EMEA 
EMEA revenue decreased by $4.9 million, or 1.9%, in the year ended December 31, 2018 over the corresponding period in 2017. This decrease was driven by a reduction in revenue from one large client, partially offset by organic growth from new accounts added during the last 12 to 18 months.
 
LATAM
LATAM revenue decreased by $9.0 million, or 9.8%, in the year ended December 31, 2018 over the corresponding period in 2017. This decrease was driven primarily by a decline in marketing spend by a few existing customers as well as foreign currency impacts.

Cost of goods sold
 
2019 compared to 2018. Our cost of goods sold increased by $28.5 million, or 3.3%, in the year ended December 31, 2019 over the corresponding period in 2018. The increase is a result of increased revenue along with incremental costs related to bill and hold arrangements. Our cost of goods sold as a percentage of revenue was 77.4% in 2019 and 77.4% in 2018

2018 compared to 2017. Our cost of goods sold increased by $4.4 million, or 0.5%, in the year ended December 31, 2018 over the corresponding period in 2017. Our cost of goods sold as a percentage of revenue was 77.4% in 2018 and 75.8% in 2017
 
Gross Profit
 
2019 compared to 2018. Our gross profit increased by $8.2 million, or 3.2%, in the year ended December 31, 2019 over the corresponding period in 2018. This increase was primarily driven by operating efficiencies obtained in North America along with incremental revenue on certain bill and hold arrangements. Our gross profit as a percentage of revenue, which we refer to as gross margin, was 22.6% in 2019 and 22.6% in 2018.

2018 compared to 2017. Our gross profit decreased by $(21.7) million, or (7.9)%, in the year ended December 31, 2018 over the corresponding period in 2017. This decrease was primarily driven by client mix of revenue in 2018 compared to 2017 as well as short-term operational challenges in certain accounts in North America. Our gross profit as a percentage of revenue was 22.6% in 2018 and 24.2% in 2017.
 
Selling, general and administrative expenses

2019 compared to 2018. Selling, general and administrative expenses decreased by $15.8 million, or 6.6%, in the year ended December 31, 2019 over the corresponding period in 2018. As a percentage of revenue, selling, general and administrative expenses decreased from 21.3% in 2018 to 19.2% in 2019. The decrease in selling, general and administrative expenses was driven by a decrease in salaries and benefits due to the restructuring plan and other cost reduction initiatives, partially offset by an increase in bonus expense, higher legal fees and additional sales tax results from a sales tax audit.


27



2018 compared to 2017. Selling, general and administrative expenses increased by $10.6 million, or 4.7%, in the year ended December 31, 2018 over the corresponding period in 2017. As a percentage of revenue, selling, general and administrative expenses increased from 20.0% in 2017 to 21.3% in 2018. The increase in selling, general and administrative expenses was primarily due to increased headcount to support the business and increased bad debt expense.
 
Depreciation and amortization
 
2019 compared to 2018. Depreciation and amortization expense decreased by $0.7 million, or 5.1%, in the year ended December 31, 2019 over the corresponding period in 2018. As a percentage of revenue, depreciation and amortization expense was 1.1% in 2019 and 1.2% in 2018. The decrease in depreciation and amortization was due to lower amortization resulting from impairment charges to intangible assets in 2018.

2018 compared to 2017. Depreciation and amortization expense decreased by $0.4 million, or 3.0%, in the year ended December 31, 2018 over the corresponding period in 2017. As a percentage of revenue, depreciation and amortization expense was 1.2% in 2017 and 1.2% in 2018. The decrease in depreciation and amortization was primarily driven by lower capital expenditures during 2018 and 2017.

Change in fair value of contingent consideration
    
2018 compared to 2017. Expense from the change in fair value of contingent consideration decreased by $0.7 million from $0.7 million in 2017 to $0.0 million in 2018. The change in the fair value of the contingent liability was driven by the final adjustment of the DB Studios liability during the first quarter of 2017 and the final adjustment of the EYELEVEL liability during the second and third quarters of 2017.

Goodwill impairment charges

As discussed in Note 5, Goodwill to the Consolidated Financial Statements, the Company recognized $46.3 million in goodwill impairment charges in 2018. No tax benefit was recognized on such charges, and the charges had no impact on our cash flows or compliance with debt covenants. No impairment charge was recognized in 2019 or 2017.

Intangible and other asset impairment charges

As discussed in Note 6, Other Intangible Assets and Note 8, Property and Equipment to the Consolidated Financial Statements, the Company recognized a $13.8 million intangible asset impairment charge related to certain customer lists, a $3.0 million long-lived asset impairment charge related to a legacy ERP system in EMEA, and a $1.3 million contract asset impairment charge related to costs to fulfill a contract that were deemed to be non-recoverable in North America in 2018. No impairment charge was recognized in 2019 or 2017.

Restructuring charges
 
For the years ended December 31, 2019 and 2018, we recognized $15.9 million and $6.0 million, respectively, in restructuring charges related to the 2018 restructuring plan. As noted in Note 7, Restructuring Activities and Charges to the Consolidated Financial Statements, the 2018 restructuring plan was approved in August 2018. As a result, the increase is primarily due to having a full year of restructuring costs in 2019 versus a partial year in 2018. The Company did not record any restructuring charges in 2017.

Income (loss) from operations

2019 compared to 2018. Income from operations increased by $79.2 million in the year ended December 31, 2019 over the corresponding period in 2018. This increase was primarily attributable to impairment charges recognized in 2018, lower amortization resulting from the impairment, higher gross profit, incremental revenue on certain bill and hold arrangements, and cost reduction efforts within the North America segment.

2018 compared to 2017. Income from operations decreased by $101.7 million in the year ended December 31, 2018 over the corresponding period in 2017. This decrease was primarily attributable to goodwill, intangibles and other asset impairments, decreased gross profit, increased sales, general and administrative expenses and restructuring charges discussed above.


28



 Other income and expense
 
2019 compared to 2018. Other expense increased by $8.3 million in the year ended December 31, 2019 over the corresponding period in 2018. This increase was primarily attributable to a $6.3 million increase in interest expense.

2018 compared to 2017. Other expense increased by $2.7 million in the year ended December 31, 2018 over the corresponding period in 2017. This increase was primarily attributable to a $3.0 million increase in interest expense.
 
Provision (benefit) for income taxes  
 
Our effective income tax rate differs from the U.S. federal statutory rate each year due to certain operations that are subject to tax incentives, state and local taxes, valuation allowances, discrete tax events and foreign taxes that are different than the U.S. federal statutory rate.

2019 compared to 2018. Provision for income taxes increased by $4.3 million from a tax benefit of $0.6 million in 2018 to tax expense of $3.7 million in 2019. Our effective income tax rate was (58.0)% and 0.8% in 2019 and 2018, respectively.

2018 compared to 2017. Provision for income taxes decreased by $11.9 million from tax expense of $11.3 million in 2017 to a tax benefit of $0.6 million in 2018. Our effective income tax rate was 0.8% and 41.5% in 2018 and 2017, respectively.

The effective tax rate for 2018 was affected by the goodwill and intangible and other asset impairment charges. For the year ended December 31, 2018, $64.4 million was recognized as a non-cash expense for which the Company was not allowed an income tax deduction, resulting in a reduction to the effective tax rate benefit being recorded on the pretax loss for the period.

On December 22, 2017, the U.S. government enacted comprehensive Federal tax legislation commonly referred to as the Tax Cuts and Jobs Act of 2017 (the “Act”). The Act makes changes to the corporate tax rate, business-related deductions and taxation of foreign earnings, among others, that will generally be effective for taxable years beginning after December 31, 2017.

Certain impacts of the new legislation would have generally required accounting to be completed and incorporated into the 2017 year-end financial statements, however, in response to the complexities of this new legislation, the SEC issued guidance to provide companies with relief. The SEC provided up to a one-year window for companies to finalize the accounting for the impacts of this new legislation. We finalized our accounting for the new provisions during the fourth quarter of 2018. The 2018 impact from finalizing the accounting for the new provisions was a net tax benefit of $0.9 million.

The Company operates under a grant of income tax exemption in Puerto Rico that became effective for certain operations occurring during the period ending December 31, 2017, and should remain in effect for 20 years as long as specific requirements are satisfied. The impact of this income tax exemption grant decreased foreign taxes by $2.9 million and $2.0 million for 2019 and 2018, respectively. The benefit of the tax exemption on diluted earnings per share was $0.05 and $0.04.

Adjusted EBITDA

Our Adjusted EBITDA by segment for each of the years presented is shown in the table below. Refer to Note 19, Business Segments to the Consolidated Financial Statements for a reconciliation of Adjusted EBITDA to net (loss) income.
 
Year ended December 31,
 
2019
 
% of Total
 
2018
 
% of Total
 
2017
 
% of Total
(dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
North America
$
85,662

 
174.6
 %
 
$
61,250

 
224.2
 %
 
$
73,790

 
128.4
 %
EMEA
12,051

 
24.6
 %
 
6,355

 
23.3
 %
 
15,293

 
26.6
 %
LATAM
1,943

 
4.0
 %
 
3,082

 
11.3
 %
 
4,278

 
7.4
 %
Other(1)
(50,611
)
 
(103.2
)%
 
(43,372
)
 
(158.8
)%
 
(35,867
)
 
(62.4
)%
Adjusted EBITDA
$
49,045

 
100.0
 %
 
$
27,315

 
100.0
 %
 
$
57,494

 
100.0
 %
(1) “Other” consists of intersegment eliminations, shared service activities and corporate expenses which are not allocated to the operating segments as management does not consider them in evaluating segment performance.

2019 compared to 2018. Adjusted EBITDA increased by $21.7 million, or 79.6%, in the year ended December 31, 2019 over the corresponding period in 2018.


29



North America
North America Adjusted EBITDA increased by $24.4 million, or 39.9%, in the year ended December 31, 2019 over the corresponding period in 2018 due to higher revenue and incremental revenue on certain bill and hold arrangements, and a decrease in selling, general and administrative expenses resulting from lower salaries and benefits due to ongoing restructuring activities and decreased bad debt expense.

EMEA
EMEA Adjusted EBITDA increased by $5.7 million, or 89.6%, in the year ended December 31, 2019 over the corresponding period in 2018 due to customer mix, incremental revenue on certain bill and hold arrangements, and reduced expenses related to restructuring efforts.

LATAM
LATAM Adjusted EBITDA decreased by $1.1 million, or 37.0%, in the year ended December 31, 2019 over the corresponding period in 2018 due to a decline in marketing spend by a few existing customers.

Other
Other Adjusted EBITDA decreased by $7.2 million, or 16.7%, in the year ended December 31, 2019 over the corresponding period in 2018 due to increased headcount to support the business and increased expenses related to temporary finance professional staff necessary to build out the finance organization and support the Company's remediation and transformation efforts.

2018 compared to 2017. Adjusted EBITDA decreased by $30.2 million, or 52.5%, in the year ended December 31, 2018 over the corresponding period in 2017.

North America
North America Adjusted EBITDA decreased by $12.5 million, or 17.0%, in the year ended December 31, 2018 over the corresponding period in 2017 due to decreased revenue and gross profit, mainly from transactional and small customers.

EMEA
EMEA Adjusted EBITDA decreased by $8.9 million, or 58.4%, in the year ended December 31, 2018 over the corresponding period in 2017 due to the decline in revenue and gross profit from one large client.

LATAM
LATAM Adjusted EBITDA decreased by $1.2 million, or 28.0%, in the year ended December 31, 2018 over the corresponding period in 2017 due to a decline in marketing spend by a few existing customers.

Other
Other Adjusted EBITDA decreased by $7.5 million, or 20.9%, in the year ended December 31, 2018 over the corresponding period in 2017 primarily due to increased headcount to support the business.

Adjusted Diluted Earnings (Loss) Per Share
 
Adjusted diluted earnings (loss) per share, which represents net (loss) income, with the addition of exclusive items that are non-recurring to our operating business, divided by the weighted average shares outstanding plus share equivalents that would arise from the exercise of stock options and restricted stock and other contingently issuable shares, is considered a non-GAAP financial measure under SEC regulations. Diluted earnings (loss) per share is the most directly comparable financial measure calculated in accordance with GAAP. We present this measure as supplemental information to help our investors better understand trends in our business over time. Our management team uses adjusted diluted earnings per share to evaluate the performance of our business. Adjusted diluted earnings (loss) per share is not equivalent to any measure of performance required to be reported under GAAP, nor should this data be considered an indicator of our overall financial performance and liquidity. Moreover, the adjusted diluted earnings (loss) per share definition we use may not be comparable to similarly titled measures reported by other companies. 


30



Our adjusted diluted earnings (loss) per share for each of the years presented was as follows (in thousands, except per share amounts):
 
Year Ended December 31,
 
2019
 
2018
 
2017
Net (loss) income
$
(10,075
)
 
$
(76,683
)
 
$
15,869

Restructuring charges
15,918

 
6,031

 

Executive search fees
80

 
235

 
454

Professional fees related to control remediation
1,130

 
2,430

 

Sales and use tax audit
25

 
113

 
203

Other professional fees(1)
2,241

 
507

 

Fair value of warrants and derivatives
2,057

 

 

Foreign exchange loss(2)
773

 

 

Goodwill impairment

 
46,319

 

Intangible and other asset impairments

 
18,121

 

Senior leadership transition and other employee-related costs

 
1,410

 

Obsolete retail inventory

 
950

 

Professional fees related to ASC 606 implementation

 
1,092

 
829

Business development realignment

 

 
1,287

Change in fair value of contingent consideration

 

 
677

Czech exit from exchange rate commitment

 

 
432

Czech currency impact on procurement margin

 

 
860

Accelerated depreciation of internal use software

 

 
397

Income tax effects of adjustments
(4,852
)
 
(6,280
)
 
(1,390
)
Adjusted net income (loss)
$
7,297

 
$
(5,755
)
 
$
19,618

 
 
 
 
 
 
GAAP Weighted-average shares outstanding – diluted
53,293

 
52,230

 
54,944

Effect of dilutive securities:
 
 
 
 
 
Employee stock options and restricted common shares
486

 

 

Adjusted weighted-average shares outstanding – diluted
53,779

 
52,230

 
54,944

Adjusted diluted earnings (loss) per share
$
0.14

 
$
(0.11
)
 
$
0.36

(1) Other professional fees relate to temporary finance professionals necessary to build out the Company's finance organization during transformation efforts and professional fees related to the adoption of ASC 842, Leases.
(2) Foreign exchange losses that represent a one-time loss during the third quarter of 2019. As a result of the successful completion of the Company's refinanced debt structure on July 16, 2019, the Company experienced increased foreign currency exposure due to the change in structure of the prior debt facility as compared to the refinanced debt facilities. The increased foreign currency exposure during the third quarter of 2019 was due to the remeasurement of intercompany loan balances designated as temporary. During the fourth quarter of 2019, the Company converted certain intercompany loan balances to permanent.

Impact of Inflation
 
In the second quarter of 2018, the Argentinian economy was classified as highly inflationary under GAAP due to multiple years of increasing inflation, the devaluation of the Argentine peso ("ARS") and increasing borrowing rates. Effective July 1, 2018, the Company's Argentinian subsidiary is being accounted for under highly inflationary accounting rules, which principally means all transactions are recorded in U.S. dollars. The application of highly inflationary accounting did not have a material impact on our operations for the years ended December 31, 2019, 2018 and 2017.

31



 
Liquidity and Capital Resources

The following table presents cash flows for the years ended December 31, 2019, 2018 and 2017 (in thousands):
 
Year Ended December 31,
 
2019
 
2018
 
2017
Net cash provided by operating activities
22,470

 
23,058

 
11,698

Net cash used in investing activities
(14,099
)
 
(11,141
)
 
(12,483
)
Net cash provided by (used in) financing activities
8,977

 
(13,736
)
 
(525
)

At December 31, 2019, we had $42.7 million of cash and cash equivalents compared to $26.8 million at the end of 2018.
 
Operating Activities. Cash provided by operating activities primarily consists of net (loss) income adjusted for certain non-cash items, including depreciation and amortization and share based compensation and the effect of changes in working capital and other activities.

Cash provided by operating activities in 2019 was $22.5 million and primarily consisted of $23.1 million of non-cash items and $9.4 million provided by working capital, offset by $10.1 million of a net loss during the year. The working capital changes consisted of an increase in accounts receivable of $12.3 million, increase in prepaid expenses and other assets of $6.5 million, increase in accrued expenses and other liabilities of $22.8 million, partially offset by a decrease in accounts payable of $15.6 million, and a decrease in inventories of $21.0 million.

Cash provided by operating activities in 2018 was $23.1 million and primarily consisted of $82.4 million of non-cash items and $17.3 million provided by working capital, offset by $76.7 million of a net loss during the year. The working capital changes consisted of a decrease in accounts receivable of $4.5 million, a decrease in prepaid expenses and other assets of $2.1 million, an increase in accounts payable of $21.6 million, and an increase in accrued expenses and other liabilities of $5.2 million, partially offset by an increase in inventories of $16.0 million.

Cash provided by operating activities in 2017 was $11.7 million and primarily consisted of $25.6 million of non-cash items and $15.9 million of net income during the year, offset by $29.8 million used to fund working capital. The working capital changes consisted of an increase in accounts receivable of $41.9 million, an increase in prepaid expenses and other assets of $13.9 million, an increase in inventories of $4.2 million, partially offset by an increase in accounts payable of $18.1 million, and an increase in accrued expenses and other liabilities of $12.1 million.

Investing Activities. In 2019, cash used in investing activities of $14.1 million was attributable to $13.4 million of capital expenditures, which was driven by software development, and $0.7 million in payments made related to the Madden acquisition.

In 2018, cash used in investing activities of $11.1 million was attributable to capital expenditures, primarily consisting of software development.

In 2017, cash used in investing activities of $12.5 million was attributable to capital expenditures, primarily consisting of software development.

Financing Activities. In 2019, cash provided by financing activities of $9.0 million was primarily attributable to proceeds from our term loan of $100.0 million, net borrowings under our new revolving credit facility of $60.6 million, partially offset by $142.6 million of net repayments under our prior revolving credit facility, the payment of debt issuance costs of $5.5 million and payments on our term loan of $2.5 million.

In 2018, cash used in financing activities of $13.7 million was primarily attributable to $25.7 million to acquire treasury stock, partially offset by $14.5 million of net borrowings under our prior revolving credit facility.

In 2017, cash used in financing activities of $0.5 million was primarily attributable to $11.0 million of payments of contingent consideration and $10.9 million to acquire treasury stock, partially offset by $20.7 million of net borrowings under our prior revolving credit facility.
 

32



Share Repurchase Program

As noted in Note 15, Share Repurchase Program to the Consolidated Financial Statements, the Company's share repurchase program lapsed during 2019 and shares are no longer available for purchase under the plan.

During the year ended December 31, 2019, the Company did not repurchase any shares of its common stock under the share repurchase program. During the year ended December 31, 2018, the Company repurchased 2,667,732 shares of its common stock for $25.6 million in the aggregate at an average cost of $9.60. During the year ended December 31, 2017, the Company repurchased 1,121,928 shares of our common stock for $11.0 million in the aggregate at an average cost of $9.78 per share under this program. Shares repurchased under the program were recorded at acquisition cost, including related expenses.

Revolving Credit Facilities and Long-Term Debt

On July 16, 2019, the Company refinanced its debt, which is further discussed in Note 9, Revolving Credit Facilities to the Consolidated Financial Statements, and in Note 10, Long-Term Debt to the Consolidated Financial Statements. The new debt structure provides long-term capital with improved flexibility to support the Company’s growth plans. The Company intends to use excess cash from operations to pay off debt and support working capital needs.

The ABL Credit Agreement contains a minimum fixed charge coverage ratio financial covenant that must be maintained when excess availability falls below a specified amount. The Term Loan Credit Agreement includes a minimum fixed charge coverage ratio financial covenant, a maximum total leverage ratio financial covenant, a minimum liquidity financial covenant and a maximum capital expenditures covenant, each of which must be maintained for the periods described in the Term Loan Credit Agreement. The Company was in compliance with all debt covenants in the Credit Agreements as of December 31, 2019.

In addition, we will continue to utilize cash, in part, to invest in our innovative technology platform, fund acquisitions of or make strategic investments in complementary businesses and expand our sales force. Although we can provide no assurances, we believe that our available cash and cash equivalents and the funds available under our new debt structure will be sufficient to meet our working capital and operating expenditure requirements for the next 12 months. We may find it necessary to obtain additional equity or debt financing in the future. 

We earn a portion of our operating income outside the United States, which is deemed to be permanently reinvested in foreign jurisdictions. We do not currently foresee a need to repatriate funds; however, should we require more capital in the United States than is generated by our operations locally or through debt or equity issuances, we could elect to repatriate funds held in foreign jurisdictions. Included in our cash and cash equivalents are amounts held by foreign subsidiaries. We had $39.9 million and $23.7 million foreign cash and cash equivalents as of December 31, 2019 and 2018, respectively, which are generally denominated in the local currency where the funds are held.

Contractual Obligations
 
The following table summarizes our contractual obligations as of December 31, 2019 (in thousands):
 
Payments due by period
 
Total
 
Less than 1 year
 
1-3 years
 
3-5 years
 
More than 5 years
Operating lease obligations(1)
$
69,717

 
$
11,477

 
$
22,773

 
$
14,506

 
$
20,961

Revolving Credit Facility(2)
60,679

 
593

 

 
60,086

 

Term Loan Credit Facility(3)
97,500

 
7,500

 
30,000

 
60,000

 

Interest payments on debt(4)
43,034

 
11,456

 
27,496

 
4,082

 

Total
$
270,930

 
$
31,026

 
$
80,269

 
$
138,674

 
$
20,961

(1) We have entered into various non-cancelable operating lease agreements within North America, EMEA and LATAM.
(2) Reflects principal for the Revolving Credit Facility. Amounts currently drawn on the Credit Facility are reflected in the "Less than 1 year" column consistent with the current classification on the consolidated balance sheets. Refer to Note 9, Revolving Credit Facilities to the Consolidated Financial Statements for additional information regarding our debt.
(3) Reflects scheduled principal payments due under the Term Loan Facility Agreement. Refer to Note 10, Long-Term Debt to the Consolidated Financial Statements for additional information regarding our debt.
(4) Includes scheduled interest payments on the term loan that were calculated based on rates in effect at December 31, 2019. Due to the uncertainty of the estimated balance of the revolving credit facility balances and interest due, future interest has not been included.


33



Off-Balance Sheet Arrangements
 
During the year ended December 31, 2019 and 2018, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K.

Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
 
Commodity Risk
 
We are dependent upon the availability of paper and paper prices represent a substantial portion of the cost of our products. The supply and price of paper depend on a variety of factors over which we have no control, including environmental and conservation regulations, natural disasters and weather. We believe a 10% increase in the price of paper would not have a significant effect on our consolidated statements of operations or cash flows, as these costs are generally passed through to our clients.
 
Interest Rate Risk
 
We have exposure to changes in interest rates on our term loan and revolving credit facility. Interest is payable at the adjusted LIBOR rate or the alternate base rate. Assuming our $105.0 million revolving credit facility was fully drawn along with our $97.5 million term loan, a 1.0% increase in the interest rate would increase our annual interest expense by $2.03 million.
 
Our interest income is sensitive to changes in the general level of U.S. interest rates, in particular because all of our investments are in cash equivalents and marketable securities. The average duration of our investments as of December 31, 2019, was less than one year. Due to the short-term nature of our investments, we believe that there is no material risk exposure.

Foreign Currency Risk
 
We transact business in various foreign currencies other than the U.S. dollar, principally the euro, British pound sterling, Czech koruna, Peruvian nuevo sol, Colombian peso, Brazilian real, Mexican peso and Chilean peso, which exposes us to foreign currency risk. For the year ended December 31, 2019, we derived approximately 30% of our revenue from international customers. Revenue and related expenses generated from our international operations are denominated in the functional currencies of the corresponding country. The functional currency of our subsidiaries that either operate or support these markets is generally the same as the corresponding local currency. The results of operations of and certain of our intercompany balances associated with, our international operations are exposed to foreign exchange rate fluctuations. Changes in exchange rates could negatively affect our revenue and other operating results as expressed in U.S. dollars. We may record significant gains or losses on the remeasurement of intercompany balances. At this time, we do not intend to, but may in the future, enter into derivatives or other financial instruments in an attempt to hedge our foreign currency exchange risk. It is difficult to predict the impact hedging activities would have on our results of operations.


34



Item 8.
Financial Statements and Supplementary Data
 
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
 

35



Report of Independent Registered Public Accounting Firm
 
To the Stockholders and the Board of Directors of InnerWorkings Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of InnerWorkings Inc. and subsidiaries (the Company) as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2019, and the related notes (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated March 17, 2020 expressed an unqualified opinion thereon.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ Ernst & Young LLP

We have served as the Company's auditor since 2005.

Chicago, Illinois
March 17, 2020

36



InnerWorkings, Inc. and subsidiaries 
Consolidated Statements of Operations 
(In thousands, except per share data)
 
Year Ended December 31,
 
2019
 
2018
 
2017
Revenue
$
1,157,834

 
$
1,121,106

 
$
1,138,370

Cost of goods sold
895,825

 
867,293

 
862,862

Gross profit
262,009

 
253,813

 
275,508

Operating expenses:
 
 
 
 
 
Selling, general and administrative expenses
222,721

 
238,537

 
227,895

Depreciation and amortization
12,328

 
12,988

 
13,390

Change in fair value of contingent consideration

 

 
677

Goodwill impairment

 
46,319

 

Intangible and other asset impairments

 
18,121